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SC clarifies right of lessee under a valid lease

Secured creditor cannot take over possession of the secured asset with the lessee under a valid lease

 A large batch of appeals moved by tenants of properties mortgaged to banks was heard by the Supreme Court. In these 75 cases, led by Harshad Govardhan vs International Assets Reconstruction Ltd, the property owners who had taken loans did not repay the amounts leading to Sarfaesi proceedings.


The major issue in the present case was whether a mortgagee of a previously leased out property (unknown to the creditor) claim possession of the property upon the failure of the mortgagor in clearing his debts within the stipulated time. The bench comprising of Hon'ble Justice A. K. Patnaik and Hon'ble Justice Gopala Gowda,primarily ruled that without the determination of a valid lease, the possession of the lessee is lawful and such lawful possession of a lessee was to be protected by all courts and tribunals. Discussing the primary need of determining the lease, the Court required that a lessee could either surrender or resist the possession of the property by the secured creditor. In the former case, the lease would stand determined even if the property be in the legal possession of the lessee but in the latter case, the authorized officer shall refer the dispute to the Chief Metropolitan Magistrate who shall then, in accordance to the principles of natural justice, validate the lease and accordingly award possession of the property to the lessee or the secured creditor. Further, the Court set aside a Judgment of the Bombay High Court and the views taken in the case of M/s Trade Well v. Indian Bank [2007 CRI. L.J. 2544], observing that the appellants, however, had no remedy under the SARFAESI (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest) Act for moving the Debts Recovery Tribunal. Concluding, the Court set aside the previous orders passed by the Chief Metropolitan Magistrate asking of him to pass fresh orders in accordance with the Court's judgment and any other law that may be relevant, after hearing the appellants and the secured creditors.

Interestingly, the Hon'ble Supreme Court has added a new twist in the CMM/DM application issue. The order went on to say "................We have already held that Section 13 of the SARFAESI Act does not provide that the lease in respect of a secured asset will get determined when the secured creditor decides to take the measures in the said section. Hence, possession of the secured asset from a lessee in lawful possession under a valid lease is not required to be taken under the provisions of the SARFAESI Act and the Chief Metropolitan Magistrate or the District Magistrate, therefore, does not have any power under Section 14 of the SARFAESI Act to take possession of the secured asset from such a lessee and hand over the same to the secured creditor. When, therefore, a secured creditor moves the Chief Metropolitan Magistrate or the District Magistrate for assistance to take possession of the secured asset, he must state in the affidavit accompanying the application that the secured asset is not in possession of a lessee under the valid lease made prior to creation of the mortgage by the borrower or made in accordance with Section 65A of the Transfer of Property Act prior to receipt of a notice under sub-section (2) of Section 13 of the SARFAESI Act by the borrower.

So from now on, the application to the Chief Metropolitan or District Magistrate will now have to carry the above statement apart from those specified by the Section 14 of the ACT.

 [Harshad Govardhan Sondagar v. International Assets Reconstruction Co. Ltd. & Ors., Criminal Appeal No. 736 of 2014, decided on April 3, 2014]

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